Bad news today = good news tomorrow?
On Tuesday 28 July the Deutsche Bank made provisions for bad debt of €1bn, the write-off being against loans including homeowner mortgages. Now the focus is on the UK high street banks; Barclays, Lloyds, HSNC, etc to see what their write down for loans will be.
It is interesting to stand back and see what is happening here. The banks are effectively “clearing their books” of “potential” bad debt, whilst this hits short term profits it significantly improves the bank’s remaining loan book, in effect improving the bank’s risk rating.
This is of particular significance when taken together with the UK banks’ approach of only taking on very low risk loans, e.g. where a mortgage is given agaisnt a property at a LTV (loan to value ratio) of 70% (buy-to-let) or a maximum of 85% to 90% (homeowner). The overall effect, in combination with the write downs of riskier loans, creates a very robust loan book for the banks.
Overall this is good news for the economy in the longer-term as once the banks have more robust loan books their risk rating as perceived in the money markets will be much improved. The improved risk rating will allows banks to obtain finance at a more competitive interest rate, which in turn (hopefully) will be passed onto the property buyers and business through their mortgage and loan applications.
So, maybe this is good news for “tomorrow”.
